Disclaimer: Any opinions expressed, potshots taken, or scientific views articulated are mine, and need not represent the opinions, potshots, or scientific views of the Federal Reserve Bank of St. Louis, or the Federal Reserve System.

Monday, December 17, 2012

Rottenness

I thought I would offer some light entertainment today. This Paul Krugman post struck me as perhaps more deranged than usuual on the topic of macroeconomists.

Here are the two closing paragraphs, to give you the idea:

In fact, the freshwater side wasn’t listening at all, as evidenced by the way 80-year-old fallacies cropped up as soon as an actual policy response to crisis was on the table; and as for changing views in response to facts, well, we all know how that has gone.

The state of macro is, in fact, rotten, and will remain so until the cult that has taken over half the field is somehow dislodged.

Like most of the macroeconomists I know and talk to, I try to keep up with my field, and with what is going on in the rest of economics. That's a hard thing to do of course. It burns all the time that is left after teaching students, trying to do one's own research, and doing whatever else we need to do to get on with life.

It doesn't surprise me that Paul Krugman isn't up on what is going on in macroeconomic research. Why should we expect him to go to macro conferences, spend time in seminars, and talk to his colleagues at Princeton? He has plenty on his plate, what with delivering two NYT columns per week, blogging, talking to pundits, and giving speeches. But if he's not up on the field, what purpose does it serve to make up outlandish stuff for people to read? Maybe this just motivates the Krugman base. I have no idea.

Some of the following ideas you can find in other forms if you search my archive, but these things bear repeating once in a while.

This is actually a relatively tranquil time in the field of macroeconomics. Most of us now speak the same language, and communication is good. I don't see the kind of animosity in the profession that existed, for example, between James Tobin and Milton Friedman in the 1960s, or between the Minnesota school and everyone else in the 1970s and early 1980s. People disagree about issues and science, of course, and they spend their time in seminar rooms and at conferences getting pretty heated about economics. But I think the level of mutual respect is actually relatively high. There seem to be more serious disputes, for example, between structural and astructural labor economists than among macroeconomists.

Back in the day, there was a revolution in macro, beginning with the Phelps volume, and Lucas's "Expectations and the Neutrality of Money." At the time, this revolution was widely-misperceived as a fundamentally conservative movement. It was actually a nerd revolution. The people who led it were an inarticulate and socially awkward bunch who were not let into (or were kicked out of) the Ivy League. They had to persevere outside of the mainstream, in underdog places like Carnegie-Mellon, Rochester, and the University of Minnesota, not to mention the Federal Reserve Bank of Minneapolis.

What these people had on their side were mathematics, econometrics, and most of all the power of economic theory. There was nothing weird about what these nerds were doing - they were simply applying received theory to problems in macroeconomics. Why could that be thought of as offensive?

Since the 1970s, it is hard to identify a field called macroeconomics. People who call themselves macroeconomists have adopted ideas from game theory, mechanism design, general equilibrium theory, finance, information economics, etc. to study problems of interest to policymakers and the public at large. Sometimes it's hard to tell a macroeconomist from a labor economist, from someone working on industrial organization problems. What are "freshwater" and "saltwater" macro? No idea. In Paul Krugman's own department at Princeton, Richard Rogerson, who was a student of Ed Prescott's, resides with Nobu Kiyotaki, who was a student (or at least a coauthor) of Olivier Blanchard's. There are other macroeconomists there with PhDs from Chicago, Minnesota, and MIT. What school of thought drives that place? Beats me.

The truth is that we have all moved on from the macro world of the 1970s. Methods that seemed revolutionary in 1972 are the methods everyone in the profession uses now. The nerds who had trouble getting their papers published in 1972 went on to run journals and professional organizations, and to win Nobel prizes. This isn't some "cult that has taken over half the field," it's the whole ball of wax. Rotten? No way!

Economic science does an excellent job of displacing bad ideas with good ones. It's happening every day. For every person who places obstacles in the way of good science to protect his or her turf, there are five more who are willing to publish innovative papers in good journals, and to promote revolutionary ideas that might be destructive for the powers-that-be. The state of macro is sound - not that we have solved all the problems in the world, or don't need a good revolution.

122 comments:

By this standard, the state of "critical theory" in literature departments is also good. Common language, mutual respect, diversity of approaches, lots of papers published and prizes given out, ideas deemed "bad" displaced by ideas deemed "good", lots of nerdiness...

Noah: I want you to compare Stephen's claims against that of Paul's. Paul is saying that an entire field of inquiry is misguided and that he supposedly knows the answers. And yet you are troubled by Stephen's claims.

"What school of thought drives that place?" you ask! None and all should be the "right" answer for the "right" institution. In 1974, Marcus Miller, Reader at the time working with Harry Johnson and Alan Walters at LSE, gave me an A for a very Godley like paper. James Tobin would give a guest lecture one week followed by Alan Metzler the next, or vice versa. A real hotbed of debade across all schools of thought.

Well, maybe you do or don't know something about critical theory. No idea. But you have shown no evidence of knowing anything much about macroeconomics, and yet feel compelled to write about it. Were you slighted by a macroeconomist in a past life, or what?

Well, it may not be rotten, but to this outsider, macroeconomics seems to offer very little. What causes business cycles? What is the role of financial plumbing in economic fluctuations? Why didn't I learn about balance-sheet recessions when I took a series of macro courses (with Lucas, among others)? John Kay has a point. When the Queen of England asks, why didn't economists see the Great Recession coming? and a leading figure (Lucas) says, because our theory says you can't predict recessions, then it's time to look for other experts.

George, Yogi Berra famously said ‘It's tough to make predictions, especially about the future.’

Karl Popper wrote several books on the follies of prediction and prophecy.

Popper called it the Historicist Doctrine of the Social Sciences: (a) that the principal task of the social sciences is to make predictions about the social and political development of man, and (b) that the task of politics, once the key predictions have been made, is, in Marx's words, to lessen the ‘birth pangs’ of future social and political developments.

Popper considered historicism theoretically misconceived and ‘one of the oldest dreams of mankind—the dream of prophecy’.

Popper also said that the practical usefulness of the social sciences does not depend on their power to prophesy historical or political developments.

Both Popper and Hayek agree that the task of the social science is to trace the unintended social repercussions of intentional human actions.

Popper said that the number of factors which predate and lead to the occurrence of any event, past, present, or future, is indefinitely large, and knowledge of all of these factors is impossible, even in principle.

The future depends on the growth of knowledge (which is unknowable in advance), and countless events and social interactions we cannot predict.

Great questions! Ah, business cycles. But economists have measly equilibrium models that by definition cannot have cycles. They tell these stories to undergraduate students who should be asking for refunds being taught a fraudulent philosophy sold as "science."

I like double entry bookkeeping/accounting better than macro economics for making sense of things. With double entry bookkeeping in mind one realizes that much to the public economists can't really count at all. In fact most are miscounting! (The word count is in the word accounting)

I have looked at a few of the course requirements of undergraduate economics courses and found many do not require any accounting! Accounting is more than the language of business.

Given a choice of learning more economic mumbo-jumbo double entry bookkeeping has much more utility.

If the state of macro was good than more people than a few fringe New Keynesians and a variety of Hetereodoxers would have foreseen the crisis of 2008-present. That should have been a watershed moment for macro, but no instead it's head in the sand "We're Doing Sound Science".

"The reason why diversified buy and hold investors such as vanguard were established and became so successful is you cannot beat the market. Forecasting is a poor investment."

It's quackary like this that makes macro look bad. Of course, Jim Rose probably has some unfalsifiable claim to defend the efficient market hypothesis; but anyone with half a brain can see it's a load of bull.

For instance, there are some well known strategies that, historically, beat/under-perform the market. Screens such as the 25 week price change have been known in academia since the 60's. Additionally, screens based on high long term debt and negative cash flow will usually under-perform versus the market. A dedicated EM guy will make some kind of ludicrous excuse for these exceptions - usually invoking some kind of risk based valuation borrowed from the options world.

Never mind the absurd foundations EM theory rests on. Did you know that the average league bowler will receive an average score when compared with the rest of the league? This means you can't really be a good bowler. You should just flip a coin instead of playing.

Look, I'm not saying EM isn't right. However, its theoretical and empirical foundations should relegate it to the fringe bin. Until there's actual empirical evidence to support the theory it's all just sunshine, carebears, and happy feelings.

Williamson writes, "This isn't some 'cult that has taken over half the field," it's the whole ball of wax,' where "This" refers to those who've followed in the footsteps of Phelps and Lucas, quintessential freshwater economists of the 1970s. I don't know if it's true that the freshwater types have taken over macro. But I do know that this claim that all of macro is now freshwater, coming from a freshwater economist, is observationally equivalent to Krugman's claim that freshwater economists don't know what their saltwater colleagues are doing.

Apparently you missed a key point. There is no "freshwater" and "saltwater" any more. It's pointless to think of the profession as bifurcated in this way. We're just doing economics. Thus, to say that the freshwaters have no clue as to what the saltwaters are doing has no meaning. But, to get more specific, if you think that I don't know what New Keynesians are up to, that would be wrong.

You seem to think that this is the problem, Jim Rose below seems to think the problem is that this doesn't happen enough. Once you guys decide what really bothers you, maybe you will get some concrete answers.

Economic science does NOT do an excellent job of displacing bad ideas with good ones.

Thomas Humphrey wrote an excellent 250 year long literature survey of the rules versus discretion debate in the 1998 Richmond Fed Quarterly.

He wanted to know if macroeconomics was a progressive science in that superior new ideas relentlessly supplanted inferior old ones.

Humphrey found that:• Keynesian ideas about a lack of demand and their many antecedents gain currency when unemployment was the main concern.• Monetarist ideas tended to reign when price stability was the main problem.

The policy debate keeps recycling because 1. people forget the lessons of the past and2. For better or worse, politicians and the public have tended to believe that central banks, the focus of his studies, have the power to boost output, employment, and growth permanently.

Humphrey showed that stable policy rules are popular in good times to contain inflation; when unemployment was rising, discretionary monetary policies returned to policy vogue.

Humphrey concluded that doctrinal historian knows that much of what passes for novelty and originality in monetary theory and policy is ancient teachings dressed up in modern guises.

What I get from macro that is of value is a certain amount of specialized language for describing phenomena in a limited sphere of of social activity, and a way of conceptualizing those phenomena. For example, I learn some things are "income", some things "prices", some things are "employment", some things are "surpluses", etc. I also get some useful quasi-logical principles and identities relating these categories insofar as the relations are more or less conceptual or definitions. This gives me a kind of mental map of a part of the social terrain.

What I don't get from macro is any compelling thinking at all about what causes what in this terrain, and how the causal influence is transmitted. Even on the most elementary questions of causal dependency, there appears to be massive disagreement. And where there is not disagreement, and instead a consensus reigns, the arguments behind the consensus don't seem to be compelling, and instead often reflect a merely posited answer behind which a professional conventional consensus has grown for unaccountable reasons.

Economists are always pleading the difficulty of doing experiments in their field, and using that as an excuse for not knowing much about the causal connections. While the plea is accurate, the excuse-making is a cop out, because the more I read macroeconomists the more shocked I am by the discovery of how little many of them even care about causation.

My academic background is in analytic philosophy, and one thing I have been surprised to discover is how easy it is for philosophers to enter into the world of macroeconomics. That's because the work of macroeconomists are seems to consist primarily of building descriptions of possible worlds, and then logically deducing conclusions from those descriptions without regard to generating testable hypothesis. Nor is there a defined crowd of "experimentalists" in the field. It seems that all macroeconomists are theorists.

Now that's fun and all. But I always thought that's what philosophers did, and the economists were supposed to be doing something else that more properly fell under the label "science".

So in short, it seems to me that macroeconomics has become a modern form of scholasticism.

Just because you lack the basic tools to understand macro does not mean we're not interested in causality. What do you think all these models are for? Describing data is easy, causality is hard and cannot (I will repeat, cannot) be done without economic theory.

That's a nice, but inaccurate, line. We're fourth-rate mathematicians at best, but we aren't trying to create new math. And nobody I work with is remotely interested in what Popper had to say, we're interested in why economies behave the way they do. Your inability to grasp that is not our problem.

I guess the news did not make it to your bunker. Over a year ago, the Nobel Memorial Prize in Economic Sciences was awarded to Sargent and Sims "for their empirical research on cause and effect in the macroeconomy." You should really get out a little more.

I think what Steve might have said is that (i) there's common ground and mutual respect but (ii) lots of open issues. Identification issues are central in macro, probably more central than in other fields, which makes interpretation of evidence more difficult. So there's a lot we don't know, but in my view less than 10 or 20 years ago.

Krugman often points out specific ideas that were previously understood but that some well known practitioners seem to have forgotten.

Research programs can reach consensus without actually being sustainable. Sustainable research program have to be connected in a constructive way to the network of other research underway. Disconnected programs die.

1. No, we haven't forgotten those ideas. We don't use them for good reasons.2. "Disconnected programs die." That's the point. Modern macroeconomists are not disconnected - from each other, from the world at large, whatever. That's a myth that Krugman is trying to create.

This is a great example of epistemic closure. The test for this syndrome is whether you can accurately explain how specific critics analyze your work. If you can't, but claim their criticisms are wrong or misguided, then you are epistemically closed.

You say "This is actually a relatively tranquil time in the field of macroeconomics. ... This isn't some 'cult that has taken over half the field,' it's the whole ball of wax" and in a comment "What is "freshwater" anyway, and why do you call me that?"

In other words:- Only you and others like you are doing any work worth noticing;- If there are any critics they negligible; and - Your group doesn't have some distinct name, it is the only group and needs no name.

My work is very different from what Nobu Kiyotaki does, or what Mark Gertler does, or what Mike Woodford does, or what my colleague Yongs Shin does, for example. But I find their work interesting, I read it, and I think about it. Modern macro is a very diverse ball of wax. that's what makes it so interesting.

"If there are any critics they negligible..."

There is plenty of criticism going on - self-criticism and otherwise. That's what we're about. Some criticism is not worth listening to, though, like yours.

"Your group doesn't have some distinct name, it is the only group and needs no name"

Thanks for the reply. I don't consider myself a critic of your economics -- you are certainly right. Critics are those who can accurately understand and respond to your economic arguments, and I'm not one.

However your post is not about economic issues, but about the sociology and history of economics. In that field I'm qualified to be a critic.

I would call "New monetarist economics" the name of a subgroup, much more specific than "freshwater" and "saltwater".

Can you give names for the groups of economic research that you and Krugman belong to (respectively)? Or is he just not in any comparable group?

"There is plenty of criticism going on - self-criticism and otherwise. That's what we're about. Some criticism is not worth listening to, though, like yours."

As a student I would be very much interested in reading these criticisms. Are there any particular papers that come to mind?

What are your thoughts on economists at the BIS, such as, Borio and Bindseil? The latter having written a book critiquing Poole (1970) solution to the 'instrument choice problem' (or more appropriately operational choice problem). Genuine question: am I wasting my time reading their work?

The early models didn't hold up empirically -- the required returns to scale in the basic model were too big -- but I'm not sure why people abandoned the later versions (like Yi Wen's model with capacity utilization or Benhabib's multisector model). Maybe the degree of coordination of expectations just seemed implausible (it always has to me). To some degree the dispersed information models (Angeletos-La'O, Nimark) are the descendents of Benhabib-Farmer-Guo.

That's how it struck me. What do you mean "finally succeed?" People have been talking about animal spirits in their models for ages. Every time Roger Farmer writes down a model, he says it's about animal spirits.

Macroeconomics is powerful only at producing endless opportunities for professional advancement producing new little twists on this technique or that.

Where is the explanatory power and unification in any of this?

The use of common 'tools' to do a million things is not explanatory power or explanatory unification.

"My work is very different from what Nobu Kiyotaki does, or what Mark Gertler does, or what Mike Woodford does, or what my colleague Yongs Shin does, for example. But I find their work interesting, I read it, and I think about it. Modern macro is a very diverse ball of wax. that's what makes it so interesting."

So let me get this straight. Krugman claims, repeatedly, that he has all of the answers to all questions about macroeconomics and policy and people feel the need to criticize Steve for this post?!

Read what Krugman writes. Anybody who does research with policy implications that don't fit Krugman's worldview are condemned as dishonest and partisan. That is why he is still hung up on "saltwater" and "freshwater." He's really using these terms to mean Keynesians and non-Keynesians, the latter of which being evil by definition.

And for heaven's sake, stop with all the nonsense about who predicted the recession. Has anyone analyzed the track record of these folks? The guy standing in Time Square proclaiming the end of the world is coming will eventually be proven correct. That doesn't mean he is a good forecaster. It is also not clear that being able to predict recessions is the sine qua non of economics.

I didn't mean by "tranquil" that it was business as usual. There has been a lot of good work done in direct response to the events of the financial crisis in particular. Further, some of us have been working on banking, financial panics, credit frictions, monetary policy, etc, for a very long time, and are glad that people are rediscovering (or discovering for the first time) what we do. There is plenty of off-the-shelf published work you can find that is very useful for thinking about what is going on, if you look for it.

Is the work of Hansen and Sargent useful here ?They talk about robustness and fragile beliefs in connection to models. Presumably this rules out of court the macro "models" of the likes of Krugman and Sumner and Austrian school because there is no probability foundation to their stories - they are just that, stories. Only the work of modern macro has the requisite foundation. All macro work prior to the Kydland-Prescott-Lucas revolution is irrelevant, methodologically unsound, rather like the ether theories of medieval physics.

I wouldn't go that far. You can find plenty of value in the pre-revolution work. Sometimes people had to struggle, were unclear, or got something wrong because they did not have the tools to be precise, but there were some brilliant ideas in non-technical work.

It is not about Paul Krugman. It is really about the Post Keynesians, many of whom, particularly those most immersed in Minsky, did call it, or came closer than anybody in the New Keynesian/New Classical Synthesis group did. Some Austrians claim to have called it, such as Peter Schiff, but their claimes are not serious given that they started doing so back in 2003 or so, and accompanied their forecasts with ones of imminent outbreaks of hyperinflation, yet to be remotely observed.

As it is, the Post Keynesians were on the outside and remain on the outside, not particularly listened to by Williamson's core of mutually respecting former nerds, who have not done much better about modeling what happened even after it did. But no matter; they continue to control the top journals and the top departments, thank you.

Post-Keynesians like to claim they called it. Until you ask them to show the model they used and the parameter values that suggested a crisis is imminent. It is one thing to make a prediction on a hunch, and completely different to get the prediction by mapping real-time data on the parameter values of an explicit model. Where is the latter?

Someone was arguing above that increasing returns is a problem for multiple equilibrium business cycle models. To get the models to work requires sufficiently increasing returns, but the data doesn't seem to support that (though the measurement may not be so great). On the history of humanity, etc., the standard neoclassical growth model seems roughly consistent with post-industrial revolution growth. That model has constant returns to scale. Of course the model does not explain where the technological progress comes from that is driving everything.

X percent growth per year is not equilibrium, it is exponential growth!

(Delta X/delta time) /X =constant growth converting to continuous time growth gives ---> (dX/dt)/X= constant -->this iis a differential equation with solution X(t)=X(0)e^(constant*t). Examples ar interest in a bank account with out withdrawing or a loan with out payment of principle is exponential growth. It is not equilibrium!

Thus constant inflation is not equilibrium! Ask any one who is trying to earn a living in the real world in an inflationary time if they would describe things as in equilibrium. No they would not.

You economists and your students should be wondering why your so infatuated with equilibrium? You students should be all over their economics professors for modeling things that are the opposite of equilibrium assumption with math that only allows equilibrium.

You should tell you students from more quantitative fields that your equilibrium economics is ignorant. Then ask them why? Ask them if they start off assuming every thing is in equilibrium and wonder why they have not a clue about cycles.

X percent growth per year is not equilibrium, it is exponential growth!"

It's not Steve's fault that you don't understand the economic concept of equilibrium. Many macroeconomic models (if not the majority) have equilibria with at least one of these features. Don't use terms you can't come close to properly defining.

In economic theory, "equilibrium" need not mean "at rest." We have precise ways of defining exactly what an equilibrium is, depending on the context. This is not particular to Keynesian or non-Keynesian economics. There's always an equilibrium concept there.

"It's not Steve's fault that you don't understand the economic concept of equilibrium. Many macroeconomic models (if not the majority) have equilibria with at least one of these features. Don't use terms you can't come close to properly defining."

Well! You, You, You... Economist!

Economist defines it there for it is? Reality must fit the model?

The idea is to move away from defining what is obviously real world dynamics as equilibrium. Not to come closer to a definition of equilibrium.

Very good. When Ed was grumpy about monetary economics he would say: (i) You say money is ubiquitous. So is the post office. But we don't have a field called postal economics; or (ii) But so are cars. We don't have a field called auto economics.

Well, I am not an economist, but I find the present crisis quite fascinating intellectually. So, I started to closely follow up what economist were saying.

In 2009, when the Fed started quantitative easing, I thought that that would generate quite a lot of inflation. So did a number of economists. Those who said otherwise, I regarded as fools. Four years later, I have to acknowledge the facts and admit that the fools were right. I have also learned tons about monetary theory and policy in the process.

I also found the high budget deficits worrisome, and thought that they would lead to high interest rates. I was rather in favour of austerity. So did a number of economists. But then again, some economists which I regarded as fools said that cutting the budget was dangerous and that interest rates would fall, not rise. Again, I was wrong and the fools were right. I learned a lot in the process.

Fact of the matter, those economists that have been systematically wrong do not seem to like the hammering they are getting from those economist who have been systematically right. By experience, I have learned who I tend to trust more, as a non-economist.

Steve I am having a hard time with your dissing of increasing returns. Smith's division of labor is surely pure IR, and it is the engine of economic progress. To me, comprehension of that fact, allied to the role of exchange as the facilitator/catalyst of div of labor, is the sine qua non of economics. If neoclassical econ cant accommodate that, this is surely an indicator that neoclassical econ is flawed.

I have nothing against increasing returns. I'm just telling you what I think is the bottom line from what the people who work on growth and development tell us. There is plenty of work in that area that involves increasing returns alright, but it doesn't seem a necessary component to produce growth.

Sorry Steve, but I can't share your assessment that we all now speak the same language and use a common set of methods. Academic economists and more and more central banks use the modern macro framework in general. Meanwhile, the CBO is scaring everyone about the fiscal cliff using most probably an old style model, and their forecasts get reported in the business press as if it's almost officially true. OECD uses and old style macro model behind the analysis in its projections. And the main private sector macro consultancies like Moody's Analytics (Mark Zandi...), Oxford Economics Forecasting and EIU (they just use the OEF model if you read their documentation) use models with a structure that's from the 1970's as if Lucas (1976) and Lucas and Sargent (1980) never wrote their critiques of large macroeconometric models (Moody's Analytics and OEF have pdf's on their websites explaining their models quite well: main adjustment from 60's is they now have some rudimentary,smooth measure of flexible prices/potential output). And these are the people large corporations like GM or Airbus use to form their expectations and bring them closer to RE. I think as far the private sector expectations formation is concerned, modern macro has been almost completely ignored. Care to comment on how to adjust DSGE model predictions for agents that are using these older frameworks to form expectations?

For forecasting, you don't need economics. Those old-style models, in wide use among forecasters, are really no more than devices to enforce consistency - basically making sure the national income accounts add up. Otherwise, the forecasts are mainly judgment-driven. That's forecasting. Using those models to make predictions about the effects of policy is foolish, though, and we have known that since the 1970s. But that's still gets done, for example at the Board of Governors and the CBO. Why that happens is another question. People get invested in these things, and it becomes very hard to let go.

Stephen, the Board of Governors and the CBO do hire PhDs from top schools, students that are aware of new techniques, current literature and such. So - why would it be so hard for them to let go?Or is it more convinience? Could it be that ignorant politicians want answers fast without caring about whether the answer is right or wrong, just fast, and the simple econometric equation from the 1960s gives it to them, instead of having to explain a heavy DSGE model?

For 2 year horizon unconditional forecast horizon I thought the consensus is you're best off using some dynamic factor model or a large bayesian var (with tighter priors to allow more variables), not structural old keynesian models (or whatetever you call their modern moodys/economy.com or OEF incarnations). I'm not sure the old keynesian models dominate for longer horizons. I recall Bank of Canada documentation of their 1990's QPM model saying the long run forecast performance was horrible (talking of their previous RDX model). Not sure if that has been changed. At any rate, conditional forecasting (either policy analysis or "structural" shocks analysis is 1 of the main things macro consultancies promise to clients as a benefit of their model+judgement. And if the judgement is heavily based on IS/LM then it would tend to suffer from the same inconsistencies. I think you're right most business or government users of these models don't really understand the key underlying assumptions in many of them that firms are systematically very careless in their pricing decisions while letting quantities adjust in a Walrasian manner. To be fair, there is some intuitive appeal to the aggregate demand stories people tell that has been formalised in flexible price dsge models only recently (thinking of papers on sentiment shocks by people like Angeletos,Benhabib and coauthors). And I'm not sure academic macroeconomists have done a good job of providing intuitive business press level explanations of the stories in dsge models (it shouldn't be so hard if you try: it's mostly about supply and demand in a few key markets, how people and firms respond to incentives etc..) in terms of the toolkit of modern macro is just fundamentally different from that of many or most non academic macroeconomists. The toolkit would be more familiar to the finance people at some of the banks and at moody's than to the macro people who are wedded to the simultaneous equations+OLS or 3SLS type macroeconometrics. Maybe we just need a change of generations to occur in macroeconomics, though for that to matter you also need to work on synthesising some of the dsge insights for the many economics undergrads who will be called economists, and I'm not sure if Stephen and Barro or Andolfatto are winning the macro textbook market. Sorry for the long rant.

"you're best off using some dynamic factor model or a large bayesian var (with tighter priors to allow more variables), not structural old keynesian models"

Yes, exactly. If you let one of the large macroeconometric models run, it will forecast badly. A forecast exercise is heavily-laden with add-factors. My guess is that the same is true when these models are used to predict the effects of policy. Without add-factors, the modelers won't like the output, and they will tweak it so it fits their priors. The potential problem is that the New Keynesian models people have worked on recently could morph into exactly the same thing. Equations and shocks grow exponentially, along with the number of cooks stirring the pot. Ultimately, the model leaves behind any resemblance to a coherent, internally consistent framework, and cannot be distiguished from the 1969 Old Keynesian macroeconometric model.

He saves his iciest hate for economists. Taleb has no use for the "charlatanic" field, comparing economic research to medieval medicine. Economists are, in his estimation, weak, ignorant, fearful, and generally pathetic. At one point he fantasizes about beating up an economist in public.

"Economics, as a discipline, is a paradox wrapped up in a contradiction. The more irrelevant its models the greater the profession’s discursive success and, thus, social power. From the 1970s onwards, economics departments were taken over by a particularly narrow-minded quest for ‘solved’ mathematical models of the economy – including of finance. But to ‘solve’ our mathematical models, economists had to impose (often without stating) hidden assumptions which guaranteed that these models had nothing whatsoever to do with really existing capitalism. Yet, these very mathematical models could be used by financiers and politicians to provide a veneer of respectability to their policies and derivative trades (since the models effectively assumed, in order to be solved, that financialised capitalism is immune to crises). Thus economists were popular (and well rewarded by the financial sector and neoliberal governments) for having produced models that were, by design, irrelevant. This is why I refer to economics as a major contradiction; a most peculiar failure: It is the only discipline whose power is proportional to its theoretical failure to illuminate capitalism. And yes, it is a priesthood of sorts, in the sense that young graduates do well in the economics profession if they learn how to set up and solve these mathematical models ritualistically, accepting in the process that they will never have anything useful to say about the real world." http://yanisvaroufakis.eu/2012/12/20/will-the-real-economy-rebound-following-wall-streets-resuscitation-and-what-of-europe-interviewed-by-el-confidencial/

You're confused, but about this in particular. Being precise by writing it down formally actually reveals all the assumptions. It's all out there to be hashed over and digested. Math is our friend. We're a quantitative science.

" it is a priesthood of sorts, in the sense that young graduates do well in the economics profession if they learn how to set up and solve these mathematical models ritualistically, accepting in the process that they will never have anything useful to say about the real world."

"Consider how wrong the economics profession has been about, well, nearly everything: They misunderstood the risks of derivatives; economists developed models that assumed home prices would not fall (!). They misunderstood why the recovery from the 2001 recession produced so few jobs or why the current recovery was worse in so many ways. Oh, and despite myriad signs, they missed the worst recession since the Great Depression even as it was on top of them. The sooner they admit that their field is not a hard science, the better off we all will be." http://www.ritholtz.com/blog/2012/12/wapo-why-dont-bad-ideas-ever-die/

If you would be so kind as to provide a link to your pre-2008 mathematical / quantitative / deduction / prediction of even the theoretical *possibility* of a financial crisis such as that of 2008 , I would be more inclined to take you seriously.

So, where, exactly , were your warnings of potential global economic meltdown published ? I have searched the web, but the search engines must be missing something.

Stephen - Here you are in 2011 in part of an article ( in part) *defending* the EMH ( by means of some nifty footwork with the meaning of the word 'efficient' ) : "The reason the bubble that developed in the US over the period 2000–2006 was a bad thing was not because it was a bubble, per se, but because the bubble was built on false pretences. "

I would ask, where was it, prior to the crash, that you warned that the housing bubble was one of those awfully pesky 'false pretence' bubbles ? And if you did not , why not ? Was it perhaps because your theories only allow you to declare a bubble a 'false pretence' ( ie bad) bubble once they have been rationally irrational or efficiently inefficient enough to burst on you ?

IOW, that your mathematically spotless models are incomparable *at predicting the past* , but not so hot on actually predicting the difficult bit , ie the actual *future* ?

Your article is here , for anyone who would like to read it : http://epress.anu.edu.au/apps/bookworm/view/Agenda,+Volume+18,+Number+3,+2011/7641/Text/williamson.html

Ok , Stephen , there you say : "With financial crises, a similar issue arises. By its nature, a financial crisis is an unpredictable event. "

Then how is it that there were economists who predicted the last one ? I do not mean , they predicted it to the hour & minute, but they were aware that the conditions for a crisis existed, and shouted from the rooftops that one was on it's way, to the general derision of mainstream economists ?

I guess i mean, if you had a bunch of people walking over quicksand, the geologist among them might not be able to tell who would start to sink first & how many people would die , exactly, but a decent geologist would surely be issuing warnings that this was dangerous territory and that somebody was going to get hurt unless there was a rapid change of direction ?

My impression is that the mainstream geologists here 1) were not aware the party was walking on quicksand & 2) the fact that the exact moment of disaster may be unpredictable seems like a poor excuse for doing nothing.

You seem to be unfamiliar with the definition of the word as it is used by elites in the action of seeking to keep outlier voices of reality largely unheard and thus unable to deconstruct the popularised beliefs that underpin their privilege.

But anyway, tell us what you thought of the linked article. Or is that task beyond glib abbreviation?